Fractional ownership properties and private residence clubs are proving to be desirable vacation properties for purchasers, who can enjoy the benefits of second-home ownership at an affordable price level. This relatively new form of shared-ownership, where the purchaser has title to a fraction of the property- typically 1/4 to 1/12- features the ability to resell the property or transfer ownership interest, like any other real estate.
The widely accepted industry statistics for second home owners indicate the average usage is about 30 days per year. The fractional interest purchaser is able reduce the investment to match this usage, while enjoying the benefits of owning a unique property. For example, a 1/8 interest would entitle usage of 6 1/2 weeks per year, while significantly reducing the cost of owning and maintaining the property.
The concept of shared ownership was initially utilized as a marketing tool for selling yachts and private jets, recognizing that these are expensive items with limited overall usage. This same concept is now becoming accepted in the second home vacation property market, in that it is the property itself that desirable to use, usually located in a resort community. Assuming a 1/8 share of a property for $175,000, the purchasers are enjoying a property with a value probably in excess of $1,000,000. An investment of $175,000 won’t buy much in most resort communities.
Like condominiums, there are additional fees associated with ownership in the form of a monthly assessment, typically including taxes, insurance, deferred maintenance, and concierge/property management labor. The amount of these fees can vary widely according to the services and amenities offered. Private residence clubs, featuring services up to the level of 5-star hotels, have prices and monthly fees reflecting the cost of these services. On the other end of the spectrum, shared ownership of a single-family residence would have minimal fees, reflecting the lower costs of labor and maintenance.
Many real estate developments are now featuring fractional components within the project, bringing a level of affordability previously not available to investors. For example, a development project in McCall, Idaho, featuring lots in the $300-500,000 range and homes averaging $1.5M, has built several residences and offers 1/8 fractional ownership at $175,000. According to the developer, they are not only successful in selling to the fractional interest buyers, but are also cross-selling fractional interest shares to purchasers of lots who are not yet ready to build.
Probably the most positive news for fractional interest purchasers is that these assets are appreciating, with gains being made in the resale market. While there is never a guarantee that property values will appreciate, resale of fractional interests has generally been higher than the original price, according to industry consulting firm Ragatz and Associates. One project we are working with has resold shares that originally sold under $80,000 for prices exceeding $130,000.
The other significant new development is the availability of traditional mortgage financing for these purchasers. While there are very few banks and financial institutions offering loans to fractional purchasers, the few who are enable these customers to leverage their purchase with a 20% down loan amortized over 30 years. As more of these projects are built and sold, we expect to see more lenders enter the market, in turn providing more options for these customers.
